Financial analysis
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Financial analysis

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how to analyse a financial report and what are the key aspects of in it as well as main points.

how to analyse a financial report and what are the key aspects of in it as well as main points.

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Financial analysis Financial analysis Presentation Transcript

  • Financial Statements Analysis A.A. Samitha Jayaweera 1
  • Financial Statements……..few ?s. Do F/Ss produce comparative information? Are these information enough to make decisions? Why? - absolute figures do not produce comparative information, less utility and practical value What further do? convert into relative / comparative figures 2
  • Financial Statements Analysis -what does it do? “Financial statement analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of balance sheet and the income statement” It enhance the utility or practical value of accounting information. 3
  • Why Financial Statements analysis is needed? Since, It produces comparative information It’s a tool to identify strength and weaknesses It provides information of profitability, liquidity, efficiency and gearing/ solvency etc. 4
  • Further it Provides Answers to……. Is the firm in a position to meet current obligation? -Liquidity What sources of long-term finance are employed and its relationship (debtequity)?- Solvency How efficiently assets utilised?- Assets turnover Are earnings adequate?- Profitability 5
  • Produce Comparisons Information… Absolute increases and decreases for an item from year to year % increases and decreases for an item from year to year Trend % % of single item to an aggregate total Ratios 6
  • Compare with……. Past years ratios Budgeted/ standards Intra company - divisional Inter company - industry 7
  • Analytical Techniques Horizontal analysis Vertical analysis Trend analysis Common-size analysis Ratio analysis Cash flow analysis 8
  • Horizontal Analysis The calculation of $ (Rs. value) changes or % changes in the statement or total Ex; changes in sales, total operating expenses, N.P. It detects changes in company performance It highlights trends 9
  • Horizontal Analysis 2010 Revenue Sales 207,500 Cost of sales 145,000 Gross profit 62,500 Operating Expenses Selling & Distribution 19,750 Administrative 24,820 Total Operating Expenses 44,570 Profit from operations 17,930 Interest expenses 1,500 Profit before tax 16,430 Income tax 4,930 Profit after tax 11,500 2009 increase/ (decrease) 159,500 114,500 45,000 48,000 30,500 17,500 13,650 16,300 29.950 15,050 1,200 13,850 4,432 9,418 6,100 8,520 14,620 2,880 300 2,580 498 2,082 % 30.1 26.6 38.9 44.7 52.3 48.8 19.1 25.0 18.6 11.2 22.1 10
  • Trend Analysis Based on Horizontal analysis % es are calculated for several successive years select a based year which assign a weight of 100% Ex; base year sales is 100% current year 110% OR 95% etc; 11
  • Trend Analysis Sales Net profit 2006 2007 2008 2009 2010 100 85 119 158 205 100 89 123 142 174 12
  • Vertical Analysis Items in a single financial statement are expressed as a % of a significant total. Ex: cost of sales as % to turnover, G.P. as % to cost of sales/ turnover 13
  • Vertical Analysis 2010 % Revenue Sales 207,500 100.0 Cost of sales 145,000 69.9 Gross profit 62,500 30.1 Operating Expenses Selling & Distribution 19,750 9.5 Administrative 24,820 12.0 Total Operating Expenses 44,570 21.5 Profit from operations 17,930 8.6 Interest expenses 1,500 0.7 Profit before tax 16,430 7.9 Income tax 4,930 2.4 Profit after tax 11,500 5.5 2009 % 159,500 114,500 45,000 100.0 71.8 28.2 13,650 16,300 29.950 15,050 1,200 13,850 4,432 9,418 8.6 10.2 18.8 9.4 0.7 8.7 2.8 5.9 14
  • Common size Analysis Common –size financial statements show only % value, no absolute value In common-size balance sheet all values of assets items are presented as a % to total assets where as liability items are presented as a% to total liabilities Income statement- all items are presented as a % to net sales 15
  • Common-Size Analysis 2010 Revenue Sales Cost of sales Gross profit Operating Expenses Selling & Distribution Administrative Total Operating Expenses Profit from operations Interest expenses Profit before tax Income tax Profit after tax 2009 100.0 69.9 30.1 100.0 71.8 28.2 9.5 12.0 21.5 8.6 0.7 7.9 2.4 5.5 8.6 10.2 18.8 9.4 0.7 8.7 2.8 5.9 16
  • Ratio analysis Items of the financial statements are presented as comparative figures as ratios 17
  • Classifications of ratios Liquidity ratio - ability to meet current obligation Leverage ratio - proportion of debt equity Activity ratio - efficiency of assets utilisation Profitability ratio - overall performance 18
  • Liquidity ratio Current ratio Quick ratio Working capital analysis 19
  • Leverage / Capital stricture ratios Debt- equity ratio (long-term debt to equity, total debt to equity, debt to total capital) 20
  • Activity/ efficiency ratio Inventory turnover and stock holding period Debtors turnover and collection period Fixed assets turnover Total assets turnover Capital employed turnover 21
  • Profitability ratio Gross profit margin, Net profit margin Return on investment (return on assets, return on capital employed, return on shareholder’s equity) Earning per share, Dividend per share Earning yield, Dividend yield Price earning ratio Earning power 22